Industrial Production Rebounds In May - June 16, 2014

This morning, the Federal Reserve, which embarks on a busy week that includes a two-day meeting to discuss monetary policies, reported that industrial production for the month of May rose 0.6% after declining by 0.3% in the prior month. The report, along with a favorable reading earlier this month on manufacturing activity from the Institute for Supply Management, an Arizona-based trade group, indicates growth in the manufacturing sector. Such data are yet another indication that the U.S. economy is strengthening and should, along with an improving employment picture, allow the central bank to continue cutting back on its accommodative bond-buying program.

The primary catalyst behind the May increase, which was slightly better than the consensus expectation, was a 1.3% rise in mining output. We also saw sharp positive reversals in the production of consumer goods, construction, and materials. And, after a notable 4.5% decline in April, utilities production retreated by a more modest 0.8% last month. Meantime, capacity utilization rose to 79.1 in May, after a slight dip in the month of April. Overall, for the 12-month period ended May 31st, industrial production and capacity utilization were up 4.3% and 2.4%, respectively.

As noted, the latest improvement in industrial production and capacity utilization indicates that manufacturing activity in the U.S. is improving. The uptick in industrial production, along with notable improvements in a few other important sectors of the economy, including the labor market, which added 217,000 new jobs in May (the fourth consecutive month nonfarm payrolls topped the 200,000 mark), gives us more confidence that the nation’s GDP will rebound from the 1.0% contraction that we witnessed in the first quarter. Our current stance is that the economy will grow by around 3.0% over the final three periods of this year.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.